/as-/ 


THE  IMPORTANCE  OF 
I  COMPETITION 

BETWEEN  RAILWAYS 


BY 


EDWARD  DUDLEY  KENNA 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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APi 


THE  IMPORTANCE  OF 

COMPETITION 
BETWEEN  RAILWAYS 


BY 

EDWARD  DUDLEY  KENNA 


* 


I*  *.  I  '\  •]«  ;*'."*" 


CONTENTS 


I.— The  Collapse  of  1917 
II.— The  Predicament  of  1919 
III. — The  Importance  of  Competition 
IV. — The  Triangle — Labor,  Capital  and  Commerce 


395828 


"The  highways  of  nations  are  the  measure 
of  their  civilization.  Without  roads  there 
can  be  no  society,  government,  commerce  or 
intelligence.  In  exact  proportion  to  the 
abundance  and  excellence  of  highways  (and 
in  exact  proportion  to  the  cost  of  transpor- 
tation on  those  highways) ,  are  the  exchanges 
of  services  between  men,  the  communication 
of  thought,  the  augmentation  of  wealth,  the 
growth  of  comfort,  the  development  and 
consolidation  of  the  civilized  States." 
(United  States  Government  Report  on 
Pacific  Railways;  1869.) 


THE  COLLAPSE  OF  1917 

T  F  one  will  trace  the  course  of  a  public  pol- 
icy that  has  failed  he  can  usually  find 
the  forks  at  which  the  wrong  turn  was  taken ; 
therefore,  when  a  public  policy  becomes  in- 
effective, change  should  be  preceded  by  a 
search  for  the  causes  of  failure.  To  com- 
prehend the  conditions  which  required  the 
Government  to  commandeer  the  railways  in 
December,  1917,  it  is  necessary  to  go  back 
to  the  beginning  of  our  railways. 

In  that  beginning  when  the  railed  way 
was  an  experiment  our  Governments,  State 
and  Federal,  were  eager  and  willing  that 
private  capital  should  incur  all  the  hazards 
of  its  development ;  and,  when  its  utility  was 
demonstrated,  these  Governments,  being 
poor,  induced  investors  to  build  the  railways 
conformably  to  a  public  policy  under  which 
such  investors,  incorporated,  were  not  only 
to  build,  and,  to  own,  but,  also  to  operate 


the  railways.  Inconsistently,  these  privately 
owned  and  operated  railways  were  declared 
to  be  highways.  This  incongruous  arrange- 
ment sprang  from  the  assumption  that  the 
rail  thoroughfares  were  to  be  a  substitute  for 
the  common  highways,  which  experience  had 
shown  might  be  owned  by  private  corpora- 
tions. Therefore,  early  railway  legislation 
developed  on  the  general  lines  prescribed 
for  turnpikes  and  toll-roads,  ignoring  that 
it  is  not  feasible  for  every  person  who  may 
own  a  locomotive  and  a  car  to  use  a  rail- 
way in  common  with  other  like  users.  The 
seriousness  of  this  mistake — which  was  soon 
corrected  in  practice — lies  in  the  erroneous 
public  view  of  the  railway  it  induced  without 
correcting:  the  public  failed  to  see  that  the 
State  was  creating  a  private  monopoly. 

The  owners,  of  course,  realized  that  every- 
one was  to  have  the  right  to  ship  and  travel 
over  their  railways,  and  the  public  were 
aware  that  they  must  pay  for  the  exercise 
of  such  right;  but  where  men  must  use  a 
thing  controlled  by  a  private  monopoly,  such 
as  water,  light,  or  a  public  highway,  an  un- 
ending struggle  between  owners  and  users 


is  inevitable.  This  affords,  perhaps,  a  strong, 
yet  not  necessarily  a  controlling  argument, 
in  favor  of  ownership  by  the  State  of  all 
public  utilities.  However,  the  need  for  rail- 
ways grew  so  fast  that  their  builders  were 
everywhere  welcomed  as  benefactors,  and  he, 
who  prior  to  1870  would  have  assaulted  the 
basis  of  their  credit  would  have  been  re- 
garded as  a  public  enemy.  But  when  almost 
every  town  had  its  railway  and  earlier  needs 
were  satisfied  and  forgotten,  the  owners  be- 
came as  unpopular  as  absentee  landlords. 
Why  this  happened  and  to  what  extent  the 
owners  themselves  were  responsible  for  the 
change  is  not  pertinent  to  the  subject  we  are 
discussing,  which  is  a  study  of  causes,  not  an 
inquiry  into  the  responsibility  for  their  oc- 
currence. 

Every  snapshotter  of  the  railway  question 
is  familiar  with  the  "Granger  Movement," 
yet  not  all  profound  students  of  it  realize 
that  its  consequences  produced  the  break- 
down of  1917 — a  break-down  we  shall  face 
again  if  the  railways  are  returned  to  their 
present  owners  to  be  operated  under  pres- 
ent laws.  The  line  of  cleavage  in  the  rail- 


way  controversy  goes  back  to  the  contract 
between  the  States  and  investors  contained 
in  the  charters  authorizing  the  construction, 
ownership  and  operation  of  the  railways, 
and  had  its  origin  in  the  failure  of  both  the 
public  and  the  investors  to  appreciate  that 
what  they  were  seeking  to  do  was  an  im- 
possible thing.  The  corporations  were  given 
the  right  to  own,  to  operate,  and  to  fix  the 
tolls  which  should  be  paid  by  shippers  and 
passengers:  language  could  not  be  more 
clear  than  that  by  which  investors  were  in- 
duced to  believe— and  continued  to  believe 
until  as  late  as  1875 — that  the  power  of  the 
corporation  to  fix  tolls  was  absolute. 

And  even  when  the  Supreme  Court  of  the 
United  States  held  that  such  power  was 
within  the  control  of  the  State,  four  out  of 
nine  Justices  of  that  Court  dissented  and 
continued  to  assert,  that  the  plain  intent  of 
the  language  used  in  the  grants  could  not  be 
tortured  into  a  contrary  meaning.  And 
though  to-day  it  seems  incredible  that  our 
people  ever  intended  to  give  a  private  cor- 
poration the  uncontrolled  power  to  make  its 
own  rates,  the  fact  is  this  power  was  given. 


Anyone  doubting  the  latter  assertion  is  re- 
ferred to  the  State  Charters  granted  before 
1870,  and  to  any  of  the  Pacific  Railroad 
Charters  granted  by  Congress.  And,  if  after 
reading  such  charters  he  still  doubts  the  pub- 
lic understanding  at  that  time,  let  him  truth- 
fully answer  these  questions :  Would  invest- 
ors in  1850,  or,  in  1870,  have  subscribed  for 
railway  shares,  or  bonds,  had  they  been  told, 
or  had  they  suspected,  that  the  time  would 
come  when  the  Government  would  compel 
those  corporations  to  provide  a  service  at  a 
cost  in  excess  of  what  might  be  collected 
therefor?  Is  it  imaginable,  that  the  savings 
of  those  days  would  have  poured  into  rail- 
way treasuries  had  investors  known  that  rail- 
way charters  would  be  so  construed  as  to 
enable  employees  to  fix  their  own  wages,  and 
to  permit  shippers  to  make  their  own  rates? 
But  it  may  be  said,  money  was  invested 
in  railway  securities  after  the  rendition  of 
the  decisions  of  the  Supreme  Court  to  which 
reference  has  been  made.  It  was:  but  from 
that  time  until  many  years  thereafter,  the 
new  money  invested  was  subscribed  either 
to  protect  already  existing  interests,  or,  to 


speculate  in  ventures  which  were  induced  by 
immense  subsidies  and  share  manipulations. 
Securities  were  issued  whose  face  values 
were  from  two  to  three  times  the  amounts 
paid  for  them  in  cash.  These  were  the  days 
when  railway  capital  was  diluted  with  water, 
and  when  speculators  and  not  investors  fur- 
nished most  of  the  new  money.  Such  un- 
sound financing  came  to  its  end  in  the  panic 
of  1898,  not  causing  it,  and  yet  not  being 
altogether  without  blame  for  it:  and  with 
this  end,  terminated  the  second  epoch  in 
railway  development,  the  first  having  ended 
coincidently  with  the  panic  of  1 873. 

About  this  time  a  decision  of  the  Supreme 
Court  was  announced  which  held  that  rail- 
way rates  made  by  the  State  can  not  be 
enforced  unless  they  allow  the  corporation 
the  cost  of  service  plus  some  profit:  the  in- 
vestor was .  to  be  permitted  to  earn  some 
profit,  but  whether  one  per  cent,  or  ten  was 
not  stated.  The  middle  of  the  road  political 
leader  was  halted.  Confiscation  under  the 
guise  of  regulation  was  rendered  impossible, 
and,  the  interest  of  investors  in  railway 
shares  and  bonds  revived.  The  railway  cor- 


porations  gained  new  strength.  There  be- 
gan a  third — and  perhaps  the  last — epoch 
of  railway  ownership  under  private  direction. 
For  a  while  popular  leaders  stood  silent, 
apparently  recognizing  the  justice  of  deci- 
sions favorable  to  investors.  But  slowly,  and 
insidiously,  there  was  spread  throughout  the 
land  this  up  to  date  propaganda :  the  courts 
had  decided  that  no  schedule  of  rates  made 
by  the  State  could  stand  which  would  reduce 
net  income  below  a  level  admitting  of  some 
profit;  but,  in  order  to  obtain  relief  against 
rates  so  established  the  courts  also  held  it 
is  necessary  for  the  carrier  to  show  that  an 
order  complained  of  would  prevent  that  re- 
sult— that  is  to  say,  the  burden  of  proving 
the  confiscation  was  placed  upon  the  carrier. 
Thereupon  rate  reductions  were  sought  and 
obtained  that  did  not  confiscate;  radical  re- 
ductions were  no  longer  asked  for  and  a 
margin  of  income  was  always  left,  but  a 
margin  so  niggardly  that  the  security  left 
was  meagre.  It  soon  became  obvious  to  in- 
vestors that  the  corporations  were  always 
to  have  their  rates  reduced  whenever  their 
net  income  showed  a  substantial  surplus,  and 


might  any  day — indeed  must  sometime — 
pass  below  the  line  of  safety  which  is  the 
boundary  of  all  sound  credit. 

Thus,  the  State  denied  the  right  to  make 
confiscatory  rates  proceeded  with  judicial 
sanction  to  control  the  net  income  of  the  cor- 
porations :  if  it  could  not  pronounce  with  ab- 
soluteness what  the  rates  should  be,  it  could 
and  did  say  what  the  net  income  should  be, 
and  thenceforth  the  Governmental  policy  be- 
came one  of  railway  income  fixing  instead  of 
railway  rate  fixing.  When  it  was  seen,  as 
fast  as  incomes  were  increased  by  economies 
and  growth  of  traffic,  that  such  increases 
were  to  be  immediately  used  not  only  as  a 
justification,  but  as  an  argument  for  rate  re- 
ductions, no  motive  remained  for  greater 
efficiency,  and  capital  became  frightened  by 
the  gradually  lessening  and  often  disappear- 
ing margin  of  safety  for  investors  in  all  rail- 
way securities. 

The  culmination  of  the  financial  difficul- 
ties of  railway  corporations  was  reached 
when  employees  demanded  higher  wages, 
and  materials  began  to  increase  in  cost. 
None  of  the  corporations  could  pay  these 


additional  charges  and  avert  bankruptcy  un- 
less permitted  to  increase  rates:  yet,  their 
requests  for  such  increases  met  with  opposi- 
tion, were  long  debated,  and,  when  not 
denied  were  allowed  grudgingly.  Under 
such  conditions  it  was  inevitable  that  many 
corporations  suffered  their  properties  to  de- 
teriorate and  failed  entirely  to  acquire  such 
additional  tracks,  terminals,  shops  and 
equipment  as  would  have  been  commensurate 
with  the  normal  growth  of  traffic :  these  cor- 
porations failed  because  lack  of  credit  left 
them  powerless  to  do  otherwise.  Other  cor- 
porations, which  despite  the  restraints  put 
upon  them  still  enjoyed  prosperity,  failed 
because  their  directors  saw  added  peril  in 
enlarging  corporate  debts  at  a  time  when 
corporate  incomes  were  fast  diminishing. 
And,  those  corporations  which  could,  and 
did  provide  adequate  facilities  were  all  too 
few  to  prevent  the  transportation  collapse 
witnessed  in  December,  1917.  Our  National 
transportation  routes  as  then  constituted, 
were  like  chains  in  which  the  weak  links  gave 
way. 

The  condition  of  the  railwavs  in  Decem- 


ber,  1917,  as  a  result  of  the  policies  we  have 
traced  may  be  summarized  briefly  thus :  some 
lacked  facilities  and  were  verging  on  a  com- 
plete physical  collapse,  and  all  were  facing 
financial  disaster,  for  if  rates  could  not  be 
increased  none  could  survive.  The  railways 
were  being  slowly  stifled — and  by  the  people 
for  whose  welfare  they  were  created  and  ex- 
isted. No  relief  was  in  sight,  for  the  public 
would  not  desist  from  its  clamorous  insist- 
ence for  rate  reductions,  and  more  costly 
service,  much  less  assent  to  rate  increases, 
while  the  attitude  of  dissatisfied  labor  grew 
threatening.  The  railway  policy  of  the 
United  States  had  failed:  the  policy  of 
ownership  and  responsibility  wholly  pri- 
vate, and  of  control  wholly  public — and  ir- 
responsible. 

We  have  seen,  that  the  disappointments; 
of  investors  and  the  dissatisfaction  of  the 
public  resulting  from  the  failure  we  have 
observed  had  their  origin  in  the  railway 
charters;  that  these  charters  were  granted 
in  ignorance  of  what  is  now  so  obvious,  that 
a  public  institution  was  being  created— not 
a  private  business — an  institution  as  essential 


to  national  growth  and  defense  as  the  Army, 
the  Navy  or  the  Treasury — more  necessary 
than  the  Post  Office — and,  that  the  construc- 
tion of  the  railways  was  a  public  work,  and 
instead  of  their  being  according  to  the  legal 
fiction  "private  property  affected  by  a  pub- 
lic interest"  the  actualities  of  their  existence 
represent  public  highways  affected  by  a 
capitalistic  interest.  Blind  to  the  real  na- 
ture of  the  enterprise,  it  is  not  strange  that 
investors  and  statesmen  did  not  foresee 
that  the  making  of  rates  for  a  public  util- 
ity, is  a  legislative  function  and  cannot  be- 
come a  property  right  under  our  form  of 
government:  the  legislature  may  delegate 
the  function  of  rate-making  to  a  Commis- 
sion, or  to  a  private  corporation,  but  it  can- 
not part  with  it  and  may  resume  it  at 
any  time.  Then  was  the  time  to  have  done 
what  must  be  done  now.  It  should  have 
been  clearly  stated  that  the  Government  is 
the  ultimate  and  therefore  the  real  rate- 
rnaker,  and  as  this  must  of  necessity  at  times 
result  in  public  use  without  compensation  of 
the  private  capital  in  the  railways,  some  as- 
surances should  have  been  given  the  investor 


that  when  non-compensatory  rates  were 
made  he  would,  nevertheless,  receive  a  fail- 
return  upon  his  investment.  It  might  have 
been  arranged  that  rates  should  never  be  so 
reduced  as  to  prevent  an  income  equivalent 
to  a  fixed  minimum  return  on  the  investment, 
or,  the  Government  could  have  guaranteed 
such  minimum:  had  either  been  done  these 
private  corporations  would  not  have  been 
found  unprovided  for  the  demands  of  war 
in  1917,  or,  for  the  demands  of  peace  in 
1919. 


II 

THE  PREDICAMENT  OF  1919 

rf^HERE  are  two  reasons  why  the  Gov- 
ernment  should  not  return  the  railways 
to  their  owners  to  be  operated  under  exist- 
ing laws,  one  reason  potent,  because  it  is 
moral,  and  the  other  imperative,  because  it 
is  vital. 

For  the  Government  to  return  the  rail- 
ways either  now — or  "twenty-one  months 
after  peace  is  declared" — would  be  a  wrong 
inflicting  great  injustice  and  causing  serious 
injury  to  many  corporations:  to  many, 
though  not  to  all  corporations,  because 
strange  though  it  may  seem,  the  action  of 
the  Government  which  would  injure  some 
might  actually  benefit  others,  The  explana- 
tion of  this  paradox  is  found  in  the  abroga- 
tion by  the  Government  of  the  competition 
which  obtained  under  private  ownership. 

Formerly  each  corporation  vied  with  its 
rivals  in  a  contest  for  traffic  and  sought  to 


obtain  business  by  widely  advertising  its 
routes  and  in  strenuous  efforts  to  provide  a 
superior  service;  and  as  a  consequence  of 
such  rivalry  passengers  would  often  take  a 
longer  route  because  of  special  advantages 
—perhaps  meals  served  thereon  were  better 
or  the  trains  handled  with  greater  regard  for 
the  passengers  comfort  and  safety — and 
shippers  would  frequently  give  all  their  busi- 
ness to  the  longer  line  because  they  found 
that  in  actual  practice  its  deliveries  were 
more  prompt,  or  its  freight  was  more  care- 
fully carried,  or  its  patrons  were  shown  more 
courteous  consideration:  thereby  names  of 
the  various  routes  and  the  good-will  so 
created  became  assets  of  intrinsic  value, 
assets  which  to  a  very  great  extent  have  been 
destroyed.  When  the  Government  seized 
the  railways  its  Administration  adopted  as 
a  fundamental  rule  of  transport  that  regard- 
less of  how  traffic  had  moved  in  the  past, 
it  must  henceforth  be  routed  over  the  line, 
that  could  handle  it  most  economically  in 
the  judgment  of  an  official  given  absolute 
power  to  discriminate  between  lines  formerly 
competitive.  Such  didacticism  of  the  Fed- 


eral  Railroad  Administration  has  possibly 
resulted  in  savings  to  the  Government,  but 
the  consequence  to  the  corporations  has  been 
as  if  in  an  industry  all  plants  were  amalga- 
mated, all  trade-marks  obliterated,  and  all 
mills  put  under  one  manager  empowered  to 
manufacture  where  he  elected,  to  fill  orders 
as  he  determined,  to  shift  employees  and 
managers  and  to  discriminate  between  the 
various  plants  as  to  which  should  be  im- 
proved and  geared  up  in  production  and 
which  slowed  down. 

Consequently,  if  now  the  railways  should 
be  returned  to  their  former  owners,  some 
would  find  their  business  greatly  increased 
because  of  the  discrimination  in  their  favor 
by  the  Federal  supervisors  of  traffic;  while 
the  unlucky  losers  of  business  so  diverted 
would  face  ruinous  conditions:  and,  gener- 
ally, the  lines  which  have  been  favored  by 
the  Federal  Administration  belong  to  pros- 
perous corporations,  and  those  which  have 
been  discriminated  against  are  the  prop- 
erty of  the  impoverished.  One  may  con- 
cede that  the  Government  officials  acted 
wisely  from  an  economical  standpoint,  and 


that  their  actions  were  amply  justified  by 
the  exigencies  of  war,  but  the  fact  remains 
that  the  Government  has  destroyed  property 
of  enormous  value.  Furthermore,  not  only 
has  the  Government  destroyed  the  good-will 
and  good  name  of  many  corporations,  but 
it  has  also  undermined  their  credit:  for  who 
will  loan  money  to  be  used  in  improving  for 
competitive  purposes  railways  that  have  been 
rejected  by  the  Government  as  unworthy 
of  development? 

But  there  is  a  second,  and  much  stronger 
reason  than  one  based  on  individual  rights, 
why  the  railways  in  their  existing  state 
should  not  be  returned  to  their  owners  with- 
out drastic  changes  in  present  laws,  and  in 
the  public  policy,  which  obtained  until  De- 
cember, 1917.  The  Government  may  dis- 
regard individual  rights  to  achieve  supposed 
public  good :  but,  here  we  see  the  harm 
that  might  be  done  the  public  would  be 
infinitely  greater  than  that  which  might 
be  done  individuals.  Those  who  think  it 
possible  for  us  to  return  to  pre-war  condi- 
tions respecting  the  railways  are  singularly 
shortsighted.  In  December,  1917,  it  was 


recognized  that  railway  facilities  had  become 
inadequate;  and,  it  was  also  plain  that  the 
railway  corporations  would  shortly  become 
bankrupt  if  the  increases  in  wages  demanded 
by  labor — and  since  granted — were  to  be 
paid  and  the  railways  not  permitted  to  in- 
crease in  ratio  their  tariffs:  therefore  the 
Government  took  over  the  railways  not  only 
to  prevent  their  physical  collapse,  but  to 
meet  a  financial  crisis.  The  catastrophe  thus 
avoided  was  not  impending  because  of  the 
war,  but  because  many  of  the  railways  were 
without  adequate  facilities,  and  lacked  the 
wherewithal  to  acquire  them:  for  the  credit 
of  many  corporations  had  been  greatly  weak- 
ened by  a  public  policy  requiring  them  to 
perform  a  public  service  and  denying  them 
the  right  to  collect  the  full  cost  of  the  serv- 
ice. Investors  refused  to  buy  the  shares,  or 
bonds,  of  such  corporations,  and,  as  a  con- 
sequence, the  corporations  found  themselves 
not  only  facing  maturing  obligations  which 
could  not  be  funded,  but  without  the  means 
needed  to  supply  the  additional  cars,  loco- 
motives, tracks  and  terminals  required  by 
shippers  obliged  to  use  their  railways.  Such 


corporations  have  now  no  greater  facilities 
than  they  had  in  1917,  and  their  credit  has 
been  further  weakened,  if  not  destroyed; 
therefore,  a  return  to  the  old  condition  would 
bring  about  a  calamity  avoided  only  by  the 
Government's  radical  action:  our  commerce 
would  be  stunted  at  a  time  when  expansion 
is  essential  to  national  progress,  and  finan- 
cial depression  would  occur  when  public  con- 
fidence most  needs  support. 

It  may  be  said  that  existing  facilities  are 
now  adequate,  which  is  true,  buc  true  because 
all  the  lines  are  used  and  operated  as  a  unit 
and  the  surplus  of  cars,  shops,  tracks  and 
terminals  owned  by  some  corporations  are 
being  employed  to  make  good  the  deficien- 
cies of  other  companies.  Returning  shops, 
tracks  and  terminals  to  their  owners  will 
require  a  return  to  such  owners  of  their  cars 
and  equipment  also,  and  be  followed,  when- 
ever business  is  restored  to  its  normal  basis, 
by  recurrence  of  the  congestion — the  intoler- 
able congestion — of  1917. 

But  as  bad  as  the  railway  situation  was  in 
December,  1917,  it  was  nevertheless  much 
better  than  it  was  destined  to  become;  be- 


cause,  there  were  still  at  that  time  many  cor- 
porations which  possessed  facilities  and 
credit  equal  to  all  their  requirements:  ship- 
pers in  certain  parts  of  the  country  were 
yet  well  served,  and  consequently  only  a 
partial  paralysis  of  commerce  had  taken 
place.  But  those  who  had  to  do  with  the 
financial  phase  of  the  transportation  situa- 
tion, as  well  as  its  physical  needs,  realized, 
as  fortunately  did  those  charged  with  the 
administration  of  the  Nation's  finances,  that 
back  of  the  chaotic  condition,  produced  be- 
cause of  the  inability  of  some  of  the  corpora- 
tions to  perform  their  public  service,  loomed 
the  great  danger  that  all  of  the  railroad 
corporations  might  become  bankrupt  and 
would  not  remain  solvent  if  the  demands 
made  by  the  employees  for  advances  in  wages 
were  granted  and  permission  to  increase 
rates  correspondingly  was  denied  by  the  In- 
terstate Commerce  Commission.  Since  then 
wages  have  been  increased,  but  the  increases 
in  rates  have  not  been  sufficient,  apparently, 
to  leave  many  of  the  lines  with  income  suffi- 
cient to  induce  investors  to  buy  either  the 
shares  or  bonds  of  the  corporations  owning 


such  lines  and  to  whom  the  railways  must 
be  returned  under  the  present  public  policy. 
It  is  certain  that  wages  will  not  be  reduced 
until  there  is  a  corresponding  decrease  in  the 
cost  of  living.  On  the  other  hand,  it  is 
hardly  reasonable  to  expect  that  the  public 
will  endure  further  increases  in  rates,  or  con- 
tinue content  with  the  character  of  service 
it  has  willingly  accepted  in  patriotic  silence 
during  the  war. 

Therefore,  to  return  to  the  conditions  of 
1917  means  to  confront  not  only  all  of  the 
evils  then  threatening,  but  to  face  a  general 
demoralization  in  the  financial  world,  result- 
ing not  only  from  the  inability  of  many  cor- 
porations now  regarded  as  prosperous  to 
meet  the  demands  made  upon  them  for  im- 
provements, but  from  the  complete  destruc- 
tion of  billions  of  capital  now  widely  distri- 
buted. From  that  there  would  be  but  one 
result:  for,  the  paralysis  of  commerce  and, 
the  enormous  losses  to  investor  would  bring 
a  preemptory  demand  for  the  resumption  of 
governmental  control.  Do  even  those  who 
favor  Government  ownership,  desire  its 
achievement  at  a  cost  so  ruinous,  or  under 
conditions  so  disastrous? 


Ill 

THE  IMPORTANCE  OF  COMPETITION 

E  writer  is  opposed  to  Government 
Ownership  of  railways;  but,  not  be- 
cause he  believes  rates  would  be  lower  under 
private  ownership :  on  the  contrary  he  knows 
that  when  the  railways  were  privately 
operated  a  man  always  got  more  for  his 
money  in  buying  a  postage  stamp  than  in 
spending  it  for  a  railway  ticket.  Nor  is  the 
writer  of  those  conservative  minded  citizens 
fearing  Government  ownership  because  of 
presumed  evil  influence  of  such  ownership 
on  the  Government:  between  the  scandals 
that  are  feared  under  one  system,  and  those 
which  have  occurred  under  the  other  there 
is  perhaps  small  choice.  Nevertheless,  while 
from  the  standpoint  of  economy  alone, 
there  is  slight  difference  between  investing 
$50,000  in  an  unneeded  railway  station  and 
donating  a  like  sum  to  a  political  party, 
there  is  the  moral  distinction,  over-fine 


though  it  may  seem  to  some,  between  using 
votes  to  get  higher  wages  and  lower  rates, 
and  using  dollars  to  get  votes. 

The  writer  favors  private  ownership  not 
only  because  he  distrusts  monopolies,  but  be- 
cause he  is  convinced  that  a  growing  country 
needs  the  enlivening  influence  of  competi- 
tion ;  and,  while  he  realizes  that  unrestrained 
competition,  like  any  excess,  hampers  de- 
velopment, he  is  sure  that  monopoly  cramps 
growth.  Would  we  now  be  in  the  front  rank 
of  nations  but  for  the  development  induced 
by  competition  between  carriers?  And  is 
it  not  to  be  feared,  that  we  cannot  maintain 
our  advanced  position  if  we  destroy  the 
spirit  of  rivalry  which  sustained  by  the  desire 
of  triumph  and  dominance,  and  intensified 
by  the  promise  of  gain  animates  business 
competition? 

If  corporate  ownership  is  considered  as  a 
means  of  restoring  this  competition  between 
railways,  it  is  necessary  to  put  aside  all  of 
the  suggestions  made  that  relate  to  "regional 
railway"  corporations:  for  if  every  region  is 
to  be  served  by  a  monopoly  it  were  much 
better  that  such  monopoly  be  governmental 


than  private,  because  in  one  the  citizen  has 
a  voice  and  in  the  other  he  has  none. 

While  no  one,  perhaps,  can  plan  the  man- 
ner of  private  ownership  that  will  supply 
what  is  desirable  in  the  competitive  system, 
avoid  the  evils  which  made  ineffective  the 
former  railway  policy  and  satisfy  public 
demands,  these  are  the  fundamentals  all 
should  consider: 

The  comfort,  safety  and  convenience  of 
passengers  are  matters  of  no  small  concern; 
and,  the  expedition  of  freights  and  the 
charges  therefor  are  not  negligible  affairs", 
but,  for  the  Nation  to  progress,  something 
more  than  a  sufficient  supply  of  cars,  loco- 
motives, tracks  and  terminals  and  reasonable 
rates  is  required.  The  success  of  enterprise 
and  industry  depends  largely  upon  the  ac- 
tivities of  railway  officials  interested  not  only 
in  providing  the  service  required  but  in  mak- 
ing rates  that  will  render  new  undertakings 
profitable.  Our  vast  interior  has  been  de- 
veloped with  corresponding  advantage  to 
seaboard  regions  because  railway  officials 
have  adjusted  rates  with  reference  to  the 
competition  of  markets.  The  line  with  the 


terminal  on  the  Great  Lakes,  the  one  extend- 
ing to  a  Gulf  port  and  that  touching  the 
Pacific  Ocean  have  in  their  rivalry  opened 
three  grain  routes  from  the  Mississippi  Val- 
ley to  the  four  quarters  of  the  world.  Every 
carrier  has  been  made  to  realize  that  the 
sure  way  for  it  to  increase  its  revenues  is  to 
increase  production  upon  its  own  rails,  and, 
for  such  purpose  it  has  not  only  made  rates 
and  given  service  that  would  enable  existing 
industries  to  flourish,  but  has  offered  en- 
couragements to  new  ones.  Where  the  de- 
velopment of  a  locality  demanded  reductions 
in  rates  on  fuel,  or  on  raw  materials,  these 
have  been  readily  granted.  It  is  because  the 
merchant  and  the  railway  official  have  found 
mutual  profit  in  adjusting  rates  to  meet  the 
demands  of  trade  that  grain  grown  in 
Montana  competes  with  that  harvested  in 
Pennsylvania;  that  fruit  grown  in  Cali- 
fornia is  sold  in  France;  that  coal  mined  in 
Virginia  is  consumed  on  the  prairies  of  Al- 
berta— a  coal  producing  province — and  that 
nearly  every  town  has  its  industries.  Com- 
merce expands  with  over-production  and 
would  shrink  with  carefully  measured  out- 


puts  based  on  assured  demands.  If  there 
were  no  excess  transportation  facilities  in 
view,  no  producer  would  incur  the  hazard  of 
producing  what  was  not  already  in  demand. 
A  reasonable  excess  of  supplies  over  known 
demands  and  a  reasonable  excess  of  trans- 
port facilities  over  existing  uses  are  the  roots 
of  all  commercial  expansion.  Although  the 
manufacturer  who  over-produces  hazards 
grave  risks  and  the  carrier  who  over-builds 
courts  disaster,  nevertheless,  there  never  has 
been  a  great  merchant,  or  a  great  builder, 
who  has  not  taken  these  chances :  and,  neither 
has  there  ever  been  a  great  country  without 
such  merchants  and  builders.  Every  reduc- 
tion in  railway  rates  made  voluntarily — and 
most  reductions  were  voluntary — was  made 
because  an  increase  in  the  net  income  for 
the  carrier  was  the  result  expected  by  the 
railway  official  who  made  it,  and  his  motive 
was  keener  grasp  of  his  position  and  the 
better  standing  with  his  principal  that  such 
profit  might  obtain  for  him. 

If  we  have  but  one  railway,  neither  the 
new  industry  is  encouraged  nor  the  old  one 
sustained:  for  both  must  measure  to  the 


gauge  prescribed  by  the  monopoly.  And 
while  corporations  possessing  a  monopoly 
sometimes  seek  zealously  new  sources  of 
profit,  their  tendency  is  restful  drifting  to- 
ward a  moribund  desuetude:  genius  may 
create  a  monopoly,  but  genius  is  not  heredi- 
tary, nor  are  geniuses  ordinarily  succes- 
sive in  organizations.  And  when  the  owner 
of  a  monopoly  becomes  satisfied  with  what 
he  has  acquired  and  achieved,  his  agents  lose 
their  chief  incentive  for  betterment.  When 
a  carrier  knows  that  a  new  undertaking  can 
settle  on  his  line  only,  and  can  ship  only  over 
one  of  his  routes,  the  danger  is  more  than 
probable  that  the  carrier  will  not  only  be- 
come a  hindrance  to  enterprise,  but  an 
obstacle  to  national  growth:  unspurred  by 
competition,  transportation,  industry  and 
trade  become  laggards  and  the  people  de- 
pendent upon  them  ossify. 


IV 

THE  TRIAKGLE — LABOR,   CAPITAL  AND 
COMMERCE 

HPHE  State  in  its  efforts  to  avoid  the  evils 
of  monopoly  should  not  forget  the  ex- 
cesses of  competition,  and  provision  should 
be  made  that  only  those  facilities  will  be  cre- 
ated for  which  a  use  exists,  or  can  be  reason- 
ably hoped  for.  Therefore,  the  new  policy 
should  not  only  protect  the  public  against 
the  intrusion  in  the  future  of  the  wasteful 
practices  of  the  past,  but  induce  a  correc- 
tion of  remediable  mistakes.  In  the  period 
of  sharp  contests  between  carriers  and  pub- 
lic elsewhere  reviewed,  various  laws  were 
enacted  and  enforced  which  not  only  pre- 
vented the  amalgamation  of  railways,  but 
every  manner  of  agreement  between  their 
owners  which  restrained  commerce.  Such 
laws  must  be  modified,  because  many  rail- 
ways were  built  for  which  no  need  existed, 
cr  future  use  will  appear.  Had  the  law  per- 


mitted,  the  prosperous  corporations  could 
have  bettered  the  situation  by  absorbing 
many  railways  which  had  become  a  burden 
to  their  owners  and  to  the  public,  or  else, 
by  entering  into  working  arrangements, 
might  have  relieved  the  necessities  of  the 
superfluous  lines.  Allowed  this  permission, 
the  railway  without  excuse  for  existence 
could  have  passed  into  strong  hands,  and 
the  railway  able  to  stand  alone  would  have 
maintained  its  independence. 

However,  we  are  more  concerned  with  the 
future  regulation  of  such  affairs  than  with 
the  consequences  of  the  policies  of  the  past, 
for  it  is  anticipated  a  billion  dollars  annually 
will  be  required  henceforth  to  enable  the 
railways  to  keep  abreast  of  commerce.  Are 
these  vast  sums  to  be  expended  in  develop- 
ing equally  the  most  fit  of  the  railways  and 
those  least  adaptable?  If  permitted  to 
agree,  the  carriers  will  arrange  for  a  com- 
mon use  of  the  superior  railways,  but  if  pre- 
\ented  they  will  continue  to  use  and  to  im- 
prove for  through  traffic  lines  that  should 
be  used  and  improved  only  to  the  extent 
justified  by  the  bulk  of  their  local  business. 


( 


Every  unnecessary  track  or  terminal  is  an 
unnecessary  charge  on  our  trade,  and  agree- 
ments between  carriers  that  are  now  for- 
bidden must  be  authorized,  else  private  own- 
ership will  start  anew  under  one  of  the 
handicaps  that  caused  it  to  fail  in  the  past 

Therefore,  the  writer  suggests  as  the  first 
principle  of  a  reconstructed  railway  policy 
thai: 

A  designated  agency  of  the  National 
Government  shall  be  given  the  power  to 
determine  what  railways  may  be  amalga- 
mated, and  what  agreements  between  com- 
petitors shall  be  authorized,  in  order  that 
sane  competition  may  be  encouraged,  unrea- 
sonable competition  prevented  and  the  joint 
use  of  facilities  increased./ 

The  public  demands  of  whoever  may  op- 
erate the  railways  that  facilities  shall  be 
adequate,  that  service  shall  be  satisfactory 
and  that  rates  shall  be  low.  Can  private 
railway  corporations  meet  these  require- 
ments? The  answer  is:  They  cannot  with- 
out assistance  from  the  Government?  In 
order  to  provide  adequate  facilities  corpo- 
rate credits  must  be  continuous:  without 


such  credit  one  will  witness  in  the  future,  as 
in  the  past,  years  of  idleness  in  car  and  loco- 
motive shops  when  prices  are  low,  materials 
cheap  and  labor  unemployed.  And  corpo- 
rate credits  should  be  not  only  uninter- 
rupted, they  should  be  unlimited,  for  the 
nation  ought  never  again  to  be  unprepared 
for  either  peace,  or  war,  because  of  a  lack 
of  transport  facilities:  such  credit  can  be 
secured  in  only  one  way, — the  Government 
must  supply  it,  and  be  compensated  there- 
for, of  course. 

A  return  of  the  railways  to  private  own- 
ership will  end  disastrously  for  the  country, 
no  matter  how  much  liberty  of  action  is 
given  the  owners,  unless  some  are  financially 
assisted  by  the  Government  All  corpora- 
tions must  provide  facilities,  and  if  subject 
to  such  compulsion  they  should  never  lack 
credit:  a  matter  of  this  vital  importance 
cannot  be  left  to  market  conditions,  to  the 
fate  of  future  legislation,  or  to  the  caprice 
of  bankers.  Those  corporations  having 
independent  credit  ought  to  be  left  free  to 
obtain  new  capital  through  their  own  medi- 
ums; but  .companies  without  such  credit 


should  be  able  to  issue  shares,  debentures,  or 
bonds  guaranteed  by  the  Federal  Govern- 
ment in  return  for  a  stipulated  participation 
in  the  net  income  of  the  corporation.  The 
consideration  of  details  has  no  place  in  this 
discussion,  which  aims  to  treat  of  principles 
which  would  be  more  confused,  than  eluci- 
dated, by  such  consideration:  but  it  may  be 
added,  that  the  Government  could  never  be 
compelled  to  loan  its  credit,  and  that  each 
case  would  be  dealt  with  acording  to  its  cir- 
cumstances and  determined  by  the  exigencies 
of  the  situation,  the  financial  condition  of  the 
corporation  seeking  assistance,  and  the  pur- 
poses for  which  the  new  capital  would  be 
asked.  As  such  assistance  would  be  with- 
held properly  from  corporations  not  wholly 
amenable  to  the  Federal  Government,  the 
second  principle  of  our  reconstructed  rail- 
way policy  would  be : 

Federal  corporations  may  be  created  with 
power  to  buy,  and  to  sell,  railways,  parts  of 
railways,  shares  and  bonds  subject  only  to 
such  limitations  as  a  designated  agency  of 
the  Government  may  impose:  and  such  cor- 
porations shall  be  privileged  to  accept  from 


the  National  Government  subscriptions  to 
shares  and  loans  of  money,,  or  of  credit,  upon 
such  terms  as  the  Government  may  offer. 

As  the  ultimate  determination  of  all  ques- 
tions respecting  rates,  or  services,  must  be 
retained  by  the  Nation,  the  agency  that  is 
to  determine  what  consolidations,  purchases 
and  agreements  will  be  permitted,  and  what 
financial  assistance  will  be  extended  may  be 
given  also,  justly,  the  power  to  make  rates 
and  to  direct  improvements  in  services  and 
facilities.  One  restraint,  only,  should  be 
laid  on  such  reserved  power :  no  order  should 
be  valid  that  would  deprive  a  Federal  cor 
poration  of  the  opportunity  to  gain  a  mini- 
mum return  on  the  capital  fixed  in  its 
charter,  or  which  would  deprive  a  State  cor- 
poration of  its  Constitutional  rights;  but, 
summary  court  proceedings  should  be  pro- 
vided for  the  determination  of  every  contro- 
versy based  on  alleged  denials  of  such 
opportunity, — or  of  such  rights:  for,  we 
ought  not  to  retrograde  to  the  earlier  state 
of  things  with  its  confusion  and  intolerable 
delays.  Rate  orders  and  orders  for  addi- 
tional facilities,  or  better  service,  should  be 


peremptory  except  in  cases  where  the  en- 
forcement of  such  orders  would  amount  to 
a  denial  of  a  right  expressly  given  by  char- 
ter, or  existing  under  the  Constitution:  and 
alleged  violations  of  such  rights  should  be 
heard  summarily.  Consequently,  we  would 
have  this,  as  the  third  principle  of  our  new 
policy: 

A  designated  agency  of  the  Federal  Gov- 
ernment shall  have  the  power  to  fix  all 
interstate  rates,  and  to  require  that  addi- 
tional facilities  and  services  be  supplied, 
subject  only  to  the  limitation  that  no  order 
shall  be  binding  if  thereby  a  corporation 
would  be  denied  the  opportunity  to  earn  a 
reasonable  return  on  capital  invested  which 
capital  and  return  shall  be  fixed  in  the  char- 
ter of  Federal  corporations,  and  shall  be 
ascertained  in  the  case  of  State  corporations 
by  appropriate  methods;  and,  a  court  pro- 
cedure shall  be  instituted  for  the  summary 
determination  of  all  controversies  respecting 
the  exercise  of  such  power. 

The  agency  entrusted  with  all  the  other 
powers  we  have  reviewed  should  not  only  be 
the  rate  controller,  but  should  be,  also,  a 


board  of  arbitration  for  the  consideration  of 
all  disputes  between  the  corporations  and 
their  employees.  It  is  assumed  that  the 
grants  of  government  aid  through  subscrip- 
tions, loans,  or  guaranties,  would  be  on  con- 
dition that  the  Government  would  partici- 
pate in  all  profits  exceeding  an  agreed  mini- 
mum fixed  for  the  investor's  security.  As  a 
consequence  of  the  various  delegations  of 
power  that  are  here  suggested,  one  body 
could  make  the  adjustments  required  to 
properly  balance  public  and  private  rights: 
for  whenever  wages  were  increased  by  an 
award  of  arbitration,  or  additional  obliga- 
tions were  imposed  upon  the  carriers  by 
mandates,  rates  could  be  increased  propor- 
tionately; and,  as  the  Government  would 
have  to  come  to  the  relief  of  corporations 
deprived  of  individual  credit,  and  would  be 
at  all  times  interested  in  the  profits  of  cor- 
porations assisted  by  it,  the  effect  of  a  par- 
ticular rate  asked  by  the  public,  or  of  a  par- 
ticular wage  demanded  by  labor,  could  be 
surveyed  in  all  its  consequences  from  the 
viewpoint  of  authority. 

The  railway  problem  is  a  triangular  one, 


involving  the  conflicting  desires  of  laborer, 
capitalist  and  shipper,  and  it  will  be  the 
sooner  solved  when  all  of  these  interests  con- 
sent to  an  arrangement  whereby  each  shall 
have  an  equal  place  at  the  counsel  table 
where  the  problem  is  to  be  solved ;  therefore, 
we  should  have  for  our  fourth  principle  the 
following : 

The  Government  agency  charged  with  the 
duty  of  fixing  rates,  acting  as  arbitrator  in 
labor  disputes,  determining  what  additional 
facilities  and  services  may  be  called  for,  and 
prescribing  what  agreements  may  be  made 
between  competitors,  shall  consist  of  men 
selected  from  the  ranks  of  capital,  labor  and 
shippers,  respectively,  and  who  will  be  ap- 
pointed and  retained  subject  to  civil  service 
rules. 

The  agency  suggested  would  require 
many  divisions,  boards  and  bureaus  to 
which,  and  in  its  own  constitution,  might  be 
assigned  the  members  of  the  present  Com- 
mission, a  body  whose  fault  is  that  it  has 
been  responsible  for  the  failure  of  the  old 
policy  without  having  had  the  power  to  ren- 
der such  policy  effective.  Under  the  new 


order  suggested,  we  would  see  the  Govern- 
ment sometimes  a  holder,  and  frequently  a 
guarantor  of  railway  securities  with  a  con- 
tingent interest  in  the  profits  of  many  cor- 
porations; we  would  protect  all  investors 
against  confiscation;  and,  we  would  provide 
a  fair  tribunal  for  the  hearing  of  the  de- 
mands of  labor:  and  shippers,  too,  would 
obtain  not  only  the  benefit  of  competitive 
services,  but  be  assured  of  a  Governmental 
control  of  rates  as  broad  as  in  fairness 
should  be  exacted.  Of  course,  strikes  would 
continue  to  occur,  rates  would  still  be 
assailed,  and  services  would  be  denounced; 
while  investors  might  lose  if  the  country 
suffered  a  financial  cataclysm:  but  we  are 
not  expecting  a  blissful  millenium,  only 
seeking  something  better  than  has  been. 

The  writer  anticipates  that  of  those  who 
may  follow  him  thus  far  some  will  ask: 
Why  are  not  the  details  set  forth  for  the 
plan  proposed?  To  such  readers  the  writer 
would  add:  it  is  confusing  to  discuss  details 
in  advance  of  the  settlement  of  principles, 
and,  when  the  latter  are  determined,  the 
subject  will  be  in  the  hands  of  the  men  most 


competent  to  settle  the  particulars,  for 
the  writer  is  among  those  who  yet  believe 
the  people's  chosen  representatives  can  be 
trusted  not  only  to  voice  the  wishes  of  the 
people,  but  to  safeguard  the  interests  of  the 
public. 

—END 


•-V 


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